How Does Central Bank Pump Money Into The System?

December 22nd, 2012 admin

i know everything about interest rates, discount rates. but my doubt is -as time keeps on passing the system needs more inflow of money(inflation). so the central bank reduces interest rates which pumps money but where will the money literally come from……..even if the interest rates are high or if they are low the TOTAL money in the system will be the same….where does the printed money literally go????

4 Responses to “How Does Central Bank Pump Money Into The System?”

It’s given to the commercial banks who put it into cash machines and stuff. The commercial banks also keep hold of old notes when they get them and send them to the bank and the bank replaces them with new ones. That’s how old money is taken out of circulation. The old money is then either incinerated of granulated.

They buy bonds issued by the government from the private sector, mostly banks, using created money to pay for them. These bonds are still counted as part of the government debt, but the FED does not get interest on them so they effectively reduce the government debt, unless the FED sells the back to the banks which would destroy the money they created when the bought them. The also intervene in the markets that banks use to balance account to smooth out random variations in the inter bank overnight interest rates. (FED fund rate). Currency is printed by the treasury on demand for banks in exchange for old currency or government bonds. However currency is not what economists mean when they refer to money. see http://en.wikipedia.org/wiki/Money_suppl…

First the old money …..banks send to central bank who destroys and sends indent to treasury for new bills.
Second … almost all countries have stopped printing extra bills.
Now pumping money….
It is done by FED ( who has huge cash reserves) by buying securities, the amount to buy is put into cash account of the seller, which are mostly banks. Thus, banks are entitled for more cash to lend and fill the ATMs.
Note :- The M in monetarism is not only cash, it is the money base M1 +M2

CB pumps money in the economy by buying Govt. securities ( for Deficit Finance, meeting international debt).
Again, dollar is the most acceptable currency in international market. In order to meet the international demand money – ”
“The Bank of Canada, the European Central Bank, U.S. Federal Reserve, Bank of England, and the central banks in Japan and Switzerland pledged to cut the rate on what’s known as “dollar swap lines.” That’s the amount of money that banks pay in order to get their hands on different currencies so they can then loan them out to customers.”
“The Bank of England today said it would pump 40 billion US dollars (£22.3bn) into money markets as part of a co-ordinated move by major central banks.”
for more pl. read News published CBC, Business Times etc.